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Master Class – Maximizing Earnings

March 20, 2013
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IF YOUR recordings are getting digital distribution, income is being generated for you. In order to get your piece of the pie, it’s important to understand where the money comes from and how it is classified and distributed so that you can maximize your earning power.

Because the paradigms for making money from music in the digital age have rapidly evolved, the variety of potential revenue streams can seem confusing at first glance. Let’s untangle the ways that artists earn income when their music is delivered over the web or via satellite and cable.

Terminology To understand how royalties are collected and distributed in the United States, you need to wrap your head around a few terms and how they are treated by U.S. Copyright Law. First, Copyright Law differentiates between compositions and sound recordings. Recordings have two sets of copyrights: the musical composition, the public performance of which is administered by the Performance Rights Organizations (PROs) such as ASCAP, BMI, and SESAC; and the sound recording itself.

 
 
 The Future of Music Coalition is a fantastic resource for information about the changes in digital rights management. Visit money.futureofmusic.org.
 
 
In the traditional broadcast model, the PROs collect money for licensed performances of the composition on broadcast radio, television, and film, and divide it between the creator of the work (the songwriter or composer) and the publisher. However, the PROs do not collect money for the performers (who may or may not be the songwriter).

In the U.S., money is not collected and distributed to the performers on a sound recording when it is broadcast over the airwaves. However, digital performances of recordings do yield such a royalty, which is split between the performers and the copyright holders of a recording (typically the record label). The way in which the music is digitally served makes a difference in terms of the rates that are due for a performance, how the royalties are collected and who distributes them.

It shouldn’t be surprising, however, that in some ways, the music biz hasn’t changed all that much. There is a degree of transparency in the government-set statutory rates that are used, and opacity in the areas involving the major labels. And as always, there are ways for consumers to get access to the music that don’t result in direct remuneration to the rights holders.

Three Ways to Earn Digital music delivery can be divided into three categories: non-interactive streams, interactive streams, and downloads/sales. Although there may be a bit of ambiguity in how a streaming service is classified, it’s important to understand how the three categories work in a general sense and how they are treated differently for royalty purposes.

Non-interactive Streaming The term non-interactive is used to describe a “radio-like” service that accepts little or no input from the listener about what music is played. A clear example of this is SiriusXM Satellite Radio. However, Pandora is also included in the non-interactive category: Although listeners can create a station based on an artist or band, the service doesn’t allow listeners to choose or repeat a specific song. Thus it is tagged as being non-interactive.

The radio-like paradigm of the non-interactive services results in a radio-like royalty stream, but with a major difference. As with terrestrial radio, non-interactive services get a blanket license with the PROs— in this case for a non-interactive stream—that is used to compensate the composer and publisher of a musical work that is played by the service. These rates are made public.

Unlike terrestrial radio, non-interactive services also pay a royalty that is divided among featured recording artists (45%), non-featured recording artists (5%), and owners of the master recording (typically a label, which gets the remaining 50%). The Copyright Royalty Board (CRB; www.loc.gov/crb), which is appointed by the U.S. Library of Congress, sets the rates based on public negotiations with interested parties that participate in a public rate-setting process every four to five years. The Library of Congress put SoundExchange (soundexchange.com), a non-profit performance rights organization, in charge of collecting and distributing these statutory rates. Visit the SoundExchange website to see the different types of non-interactive streams that are covered and what they pay.

 

 
Zoë Keating is a solo artist who has proven that musicians can make a good living from their work with digital distribution.

Musicians and master-recording owners who have music being streamed online can register with SoundExchange for free, even if they already belong to ASCAP, BMI, and SESAC. That’s because SoundExchange collects a different type of royalty from digital streaming services than the traditional PROs do. In fact, if you write, publish, perform, and release your own material, you’ll reap the maximum benefits by belonging to both types of performance rights organizations.

“The beauty of what we do is that it doesn’t all go to the big acts or the big record labels,” says Michael J. Huppe, the President of SoundExchange. “We all know that terrestrial radio has heavy spins of the bigger acts and the bigger labels. We all know that when you want to sell something at WalMart and you’re fighting over limited shelf space, obviously the larger entities have a bit more leverage. The beauty of the Internet is that there’s no limited shelf space, there’s no limited bandwidth, and there aren’t a limited number of FM stations in a market: It’s unlimited. And because of that, the money that we pay out is much more dispersed than the other revenue streams. For instance, in 2011, 90% of the payments were $5,000 or less in annual payments. I can tell you that with most of the record labels, we are the number two digital-music revenue source behind iTunes.”

Featured performers and master-recording owners get paid directly by SoundExchange. But unlike the performance tracking done by traditional PROs, which can take years to reach the composer and publisher, SoundExchange turns the money around quickly to its constituency. “Assuming everything is submitted properly [by the streaming organization],” Huppe explains, “the vast majority of our royalties go out the door in five to six months. I don’t have an exact number, but it’s north of 80%.”

The remaining 5% of royalties set aside for non-featured vocalists and non-featured musicians is sent to the AFM & AFTRA Intellectual Property Rights Distribution Fund (raroyalties.org), which was created by government statute under U.S. Copyright Law as a result of the Digital Performance Rights Amendment (DPRA) and Digital Millennium Copyright Act (DMCA). Although AFM and SAG-AFTRA are union organizations, you do not have to be a union member to collect royalties from the fund.

(The fund is also the repository of monies from the Audio Home Recording Act, Dutch home taping and broadcast royalties, and Japanese Rental Royalties.)

To see if you have unclaimed money, go to the fund website’s Digital Performance Royalties page and click on the tab marked Search Unclaimed Royalties. If your name appears on the list, you can fill out an online address form to register.

While this may seem like a chance to finally dip your beak in the digital stream if you’re a perennial side player, “the Fund only is able to make distributions on a limited number of sound recordings that were digitally transmitted each year,” according to the website. A different list of recordings are chosen for non-featured musicians and non-featured vocalists. For example, “Sound recordings subject to distribution shall be identified based on a frequency of transmission/activity report (Frequency Report) ranking provided by SoundExchange for each year of distribution. For each year, the Fund shall review the top 100 Frequency Report ranked recordings and determine the number of non-featured musicians appearing on a recording.” Consequently, this fund is less likely to generate revenue than SoundExchange does for, say, an independent artist in a niche category.

Interactive Streaming Interactive digital services, in contrast, allow listeners to choose what they hear. Such interaction differentiates this type of service from a radio-like experience, and is thus an important legal distinction when it comes to rights management. Examples of this type of service include Spotify, Slacker, and Rhapsody.

It’s also in the interactive streaming services that we lose transparency. And it should come as no surprise, because the rates for interactive performances of sound recordings are determined between each major label or aggregator (such as The Orchard/IODA) and the streaming service. The rates aren’t published, and in all likelihood they vary between the different labels and aggregators. (Aggregators act as middlemen to smaller labels and individual artists by negotiating deals with online delivery organizations and, most importantly, tracking performances, collecting money, and distributing payments.)

Interactive sites also get a blanket license from the PROs for the composition royalties of each performance, which are distributed by ASCAP, BMI, or SESAC and divided between the songwriter and publisher. In addition, interactive services pay a mechanical royalty based on a percentage of revenue. (A mechanical royalty is a compulsory statutory rate that is typically paid to publishers and composers when their works are recorded.) The royalty rate was negotiated by the Digital Media Association (DiMA), the Recording Industry Association of America (RIAA), and the National Music Publisher’s Association (NMPA) and approved by the CRB.

Consequently, songwriters, publishers, and labels (master-recording owners) will benefit the most, financially speaking, from interactive streaming. However, the return per stream is very low, and as we’ll see in a moment, you have to have some sort of mainstream visibility to reap significant financial rewards from this revenue area.

Downloads Obviously, this is the traditional sales model, where downloads are handled like sales of physical copies. And just like the world of physical product (e.g., CDs and LPs), there are levels of middlemen who take a cut of the sales based on where they are in the distribution chain. The amount you’ll earn from the download depends on whether you use an aggregator to distribute your work through services such as iTunes and Amazon MP3, whether you work directly with these services, or if you keep the middlemen to a minimum and use a DIY setup such as Bandcamp.

With the distribution landscape changing so rapidly, it’s difficult for an indie artist to manage accounts with multiple digital services without some sort of assistance. Consequently, many DIY artists use aggregators such as The Orchard/IODA and Avatar because they aggressively monitor the playing field for their constituents. On the other hand, there are hybrid services such as CD Baby that not only sell direct to customers but also act as aggregators and get your music into a wide array of services.

Of course, we’d like to keep as much of the actual sale price as possible, so why not ditch the middlemen altogether, right? In some cases, it might not make sense to completely remove all of the services between an independent musician and potential customers, because the middlemen have market reach that most indie artists do not. So it’s important to weigh the benefits of having your music available to a broader market through something like iTunes or Amazon MP3 and giving up a percentage of each sale versus keeping more of the money and selling fewer downloads because potential fans have a harder time discovering your work.

Just as they did with interactive streaming, each label and aggregator has made private deals with the larger distributors. Consequently, there is no transparency when it comes to earning equality between established acts and independent artists. In addition, no royalties are collected directly from the retailer. Rather, it’s up to the label to compensate the copyright owners in more or less a traditional way based on “units” sold.

How Much Money Are We Talking About? Other than the statutory rates that are publicly known, there is little else to go on when it comes to tracking exactly how much a given artist’s music will earn from various forms of digital performance. With a download service, you keep a percentage of the sale price after any middlemen take their cut (e.g., 30% for iTunes). It may look discouraging at first, but it’s a far more transparent scenario than the days before web-based distribution.

Considering the historically poor job that major labels have done of fairly compensating their artists, it’s a pleasant surprise to find that musicians will see returns of any kind from streaming thanks to organizations such as SoundExchange and the AFM & AFTRA Intellectual Property Rights Distribution Fund. In fact, SoundExchange will not send money that’s due to a featured performer through the record label. “If we get a Letter of Direction from a performer telling us to direct their royalties to their record label,” notes Huppe, “we won’t honor that because it is a core policy and a fundamental tenet of SoundExchange that we believe in artist-direct pay.” Thankfully, an indie artist whose music isn’t destined or designed for major label distribution doesn’t have to deal with the accounting opacity that comes with such a major’s contract.

Bay Area recording artist Zoë Keating (zoekeating.com) has presented her own earnings as an online case study of contemporary revenue sources (tinyurl.com/apvqszy). The most revealing part is a spreadsheet that tracks her royalties from October 2011 to March 2012 by income source: Spotify, iTunes, Amazon, Bandcamp, SoundExchange, and ASCAP. The thing that makes this case so compelling is that she embodies all of the earning sources: composer, performer, and master-recording owner. For example, under the SoundExchange tab you can see that she earned from those two quarterly statements $704.51 as a rights owner and $573.69 as a featured performer, the majority of which came from Pandora streams. Compare that to the quarterly statement from Spotify: It tracked 32,227 items, the bulk of which were individual streams, which yielded $132.15.

“I think Spotify is awesome as a listening platform,” notes Keating in the spreadsheet’s notes. “In my opinion, artists should view it as a discovery service rather than a source of income.” She goes on to say that as a non-mainstream artist with a variety of income possibilities, “[s]treaming is not yet a replacement for digital sales, and to conflate the two is a mistake.” At this point in time, the earning potential from a service such as Spotify is stacked against the unsigned artist, who doesn’t have a stake in company like the major labels demanded in exchange for agreeing to license their content.

As if to underline the disparity between artists and rights owners and the streaming services, I was served this chilling message from the free version of Spotify: “Why pay for Spotify? You’ll never have to buy music again.” In his blog the Lefsetz Letter, noted entertainment business attorney Bob Lefsetz repeatedly says music subscription services for listeners is the way out of this mess for artists and rights holders. “Once everybody has a subscription, there’s tons of money involved, “ he writes. “As for who’s gonna get it . . . the lion’s share of revenue for streaming services is paid to rights holders. Assuming you own your rights, that will be a lot.”

YouTube and You Another online revenue stream that can be utilized by musicians is YouTube. While labels and right-holders have been stymied in their search for a way to monetize the platform in a highly controlled way, clever artists are taking advantage of the earning power of Google AdSense to add to their bottom line.

“You can definitely make money through the ads from Google AdSense,” say Josh Kenson and Jonathan Morrison, co-founders of the music-tech site TLDToday.com. “It’s based off of views, and then the type of ads that are getting placed with your videos. And if a musician is doing it right, that’s just a portion of their income if they’re selling merchandise or doing affiliate marketing.” (An affiliate is someone who has a link on their site for a product that connects directly to a retail site. If the person viewing your page clicks on your affiliate link, you get a percentage of the sale based on the agreement between you and retailer. Companies such as Amazon may have thousands of affiliates in their program.)

Like anywhere else, advertisers pay differing amounts for ads on Google AdSense, and the amount you earn from them changes depending on which one is shown. In addition, it’s important that a relevant ad is served up when someone visits your video page. For example, if you’re in a dark metal band, a relevant ad might be one that leads to an instrument retailer, while a non-relevant ad would be one that sells, say, yoga pants.

“You don’t have a choice as to which ad is served,” notes Kenson. “We’ve seen it where the ads are relevant and the ad dollar will triple, quadruple, and sometimes even go five times over what we’d normally see. If you’re getting an ad that isn’t relevant, they’re going to a default ad and it’s paying you the minimum.” Correct tagging and titling of your video increases the chances that you’ll get relevant ads served.

You don’t have to spend big bucks to produce videos that draw attention to your music—OK Go proved that early on. The trick is to create something to visually accompany your music, whether it’s an MTV-style video, a behind-the-scenes tour diary, or a making-of documentary while you’re in the studio. The most important thing is to create compelling content that looks and sounds great, and to get lots of it out there in a timely fashion to keep your fans excited.

Embrace the Future It’s very easy to view the current state of affairs in a negative light because the traditional money making rules seem to no longer apply. Yet, the future looks very positive for the composers and performers who are willing to work hard with the latest tools and explore the new revenue models as they’re developed. Most people in the industry agree we’re in transition, and it might seem prudent to take a wait-and-see attitude. However, those who have been the most successful in recent years are the ones who have been proactive with contemporary forms of promotion, utilizing social media, YouTube, and all of the other offerings that they can have direct control over, as well as the entities they cannot, such as iTunes, Pandora, and Spotify.

It’s important to remember that even in the digital world, success comes only to those who promote their work effectively. Despite the fact that your music is available throughout the world immediately, getting the attention of music consumers is harder than it has ever been. The easy availability of music-distribution tools means that more artists are vying for listeners, so strategic marketing, even at the guerrilla level, is just as important as ever in creating fans for your work and monetizing it when you do.

Gino Robair is a former editor of Electronic Musician. Special thanks to Kristin Thomson of the Future of Music Coalition (music.futureofmusic.org), Michael Huppe of SoundExchange, Maureen Droney of the Recording Academy, Zoë Keating, and Edward R. Hearn.

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